Hamish McRae: We can change pensions all we want. We'd do just as well to change the way we work

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The Independent Online

Pensions, argh. Why is it that something so utterly vital causes so many people's eyes to glaze over? Why is it that normally sensible people make such terrible decisions over pensions? And is it really such a problem anyway?

Lord Turner did us all a favour by extending his original brief - private sector pension provision - to look at the problem in the round. His elegantly simple proposition was undeniable: that people either had to retire later, or had to have lower pensions, or working people had to pay higher taxes without any benefit to themselves. It was simply a choice of the balance between these three that society would have to make.

This Government has made one stab at choosing that balance but I don't think anyone seriously believes its judgement will be supported by voters in a couple of decades' time. I have no idea what people will choose to do then but I know they will not feel bound by some deal done between two long-retired Labour politicians.

Somehow we manage to attack politicians for the wrong things. There was a lot of fuss last week about the notion of working until you are 68 to get £3 a week more in a pension. But it is not the fault of this Government that people are living longer. The legitimate complaint against Labour is that it seriously damaged what had been a very good company pension system. In 1997, some 57 per cent of people working in the private sector contributed to a private scheme. Now that has fallen to around 43 per cent.

It is not hard to see why, for it has become a worse deal. Had Gordon Brown announced when he took office that he planned to take £50bn out of private pensions over the next decade, people would have been aghast. But that is what he has done. In spite of this, people now fuss about the retirement age a quarter of a century away. We ought to judge governments by what they have actually done, not what they say their successors but four might do at some stage in the future.

Besides, coping with changing demography is not just about pensions or indeed the retirement age. It is also about work patterns and lifestyles. To get some perspective, start with the graphs above. Britain has a pension problem - a more serious one than the US and Canada, but not as serious as that of other European countries or of Japan.

On the left you can see the problem of the changing ratio of people of working age to retirees in the G7 countries. Start with Britain. In the 1950s and 1960s, when the present clump of retirees started work, the ratio was about 4:1. In 2000 it had fallen to 3.2 to 1. In another nine years it will be about 2.7 to 1. And by 2050, when people entering the workforce now will be drawing their pensions, it will be 1.7 to 1.

By contrast the US and Canada look reasonably comfortable, with ratios remaining above 2:1 in the case of the US. But Japan and Italy face grave problems. In the case of Italy (and also Spain, not shown) there will be fewer workers than pensioners in 2050.

Of course it won't turn out quite like that. These figures are US official ones and some I have seen for the UK are a bit worse. But they show a common direction.

The other graph takes a slightly different perspective. Irrespective of the number of retirees, the size of the workforce will change, assuming a common retirement age of 65. The US, Canada and (just) the UK add to their workforce. But France, Germany and - quite catastrophically - Italy and Japan face a decline. This has already begun.

Unsurprisingly, we are already seeing governments react. France and Sweden have brought in schemes to try to persuade people to have larger families, with some success. And I saw a story a week ago that Portugal was debating a plan where people who did not have at least two children would have their pension cut. I suspect that Lord Turner would have run into even more flak had he proposed that one.

But even if family-friendly policies are more successful, they will not change the fundamental arithmetic for another generation. Children born now will not enter the workforce until about 2025.

Immigration? Well that can help and indeed will. But there are already some assumptions about that in those figures - which is why the UK does relatively well - and there are social limits to the rate at which immigrants can be absorbed.

It is against this background that the Turner plans should be viewed. They are not a solution. They cope to some extent with the pension problem but only to some extent, for changing demography is not just about money.

The entirely separate question that we need to ponder in the UK- as do people in all developed countries - is what sort of society do we want? If you think about it, the whole idea of retirement is very recent. The concept of a state retirement age is only 120 years old, and when it was introduced in Germany by Otto von Bismarck, he fixed it at 70. Most work was physical and people carried on until they could no longer do so, tailing off their hours as they grew older. Our idea of fixed factory or office hours grew out of the need for those places of work to be staffed by people at the same time.

But now we are moving to a society where things are more fluid. Some 9 per cent of the workforce in the UK are teleworkers, operating online from home or from a variety of locations using home as a base. Some 70 per cent of these are self-employed.

So the communications revolution has led to a radical change in the way we work and that great shift has hardly begun. Broadband, which in effect means that a teleworker is as close to colleagues in the office as someone on the floor downstairs, is only just being rolled out. Even more important, the flexibility offered by the communications revolution comes in the nick of time, for it gives our societies a tool to cope with an ageing workforce.

The data in these graphs won't change much. What will change is the efficiency with which we use the available workforce. Or, put the other way, the new technologies allow someone to work for, say, three hours a day at home, rather than eight hours a day after a tiring commute.

So the policy should not just be fixing pensions; it should also be removing barriers to work for people who want to do so.

How to achieve this is a vast subject and one that needs to get on the political agenda. But let's note that one obvious way would be to reduce income tax for people who work beyond the normal retirement age. If, say, income tax were halved for everyone carrying on beyond 65 (but only in earnt income), I suspect that the government would end up getting more revenue, not less. So it would be win-win.

Politically difficult? Maybe. But you must admit it is a more interesting idea than banging on about pensions.

Why spurn a little help from our friends?

The rich countries' club or a resource to help governments raise their game?

The OECD held its annual economic forum in Paris last week, at which a huge range of policies and problems were chewed over. For example, I was on a panel that discussed the role of innovation in generating growth, in which the key common point was the need for governments to focus on attracting talented people. That was considered at least as important as the incentives for R&D they pay attention to now.

Also last week, the latest forecasts for the world economy were published. The nub here was that the recent turmoil in equity markets had not damaged growth but that the other risks, far from evaporating, had actually got worse. The economics team at the OECD is particularly strong at the moment and remains willing to criticise member states' policies, frequently to their irritation.

But the aspect of the OECD's work that ought to be most valuable to its members seems frequently to go unused. It is the accumulated knowledge, across different countries, of policies that succeed and policies that fail. One example is our experience with the Home Office.

Yet this resource is not used. Instead governments either follow a "not invented here" policy and try and develop their own models, or, as in the case of the Treasury, see what the Americans have done and bring in their own version of that. No one is pointing out that a plethora of "initiatives" is self-defeating.

The OECD has a new secretary-general, the former Mexican finance minister Angel Gurria. This is encouraging partly because he has a very good reputation but also because it may help refocus the OECD on the great economic story of our times - the surge in importance of the "new" developed world. One of the many consequences of this power shift is that the governments of established developed countries are going to be under increasing pressure to raise their game. And one of the ways of doing that is to use the experience of each other - which is where the OECD can help.